Outlook for 2015 Uncertain
By John Johnson
Cotton prices as measured by the December futures contract have fallen more than 20 cents per pound since the 2014 U.S. crop was planted. In early May, December cotton at the Intercontinental Exchange was trading in the low 80-cent range on continued drought fears in Texas and the rest of the Southwest cotton growing region, but a number of fundamental factors soon began to drive prices downward.
Conditions in the Lubbock area during the first four months of the year were the driest since 1996 with the area receiving just under an inch of total precipitation. At the time, it appeared the exceptional drought conditions were poised to continue, but significant rainfall returned to the region by late May and boosted the crop outlook. It was enough to entice market bears out of hibernation.
The U.S. Department of Agriculture raised its estimate of the U.S. crop to 16.5 million bales in July, up 1.5 million from the previous month and raised it another million bales in the August report. In September, the department cut its estimate of the U.S. crop by almost one million bales due to a reduction in planted and harvested acreage estimates and lowered it another 240,000 bales in October to 16.26 million. The November and December reports pegged the crop at 16.4 million and 15.92 million bales, respectively. The wide swings in monthly crop estimates was enough to keep traders wary and on their toes as cotton futures prices continued to fluctuate in a fairly narrow range.
The burden of enormous world carryover stocks also finally began to weigh on the cotton market. For three years, China supported its farmers by purchasing their cotton at inflated prices and placing it in a strategic reserve. Consequently, world stocks grew to more than 100 million bales with roughly 60 percent of that in China. To put that level of supply in perspective, it is almost enough for the world’s textile mills to run for an entire year without purchasing a single bale of new-crop cotton.
As long as China was content to continue increasing its reserves, it appeared the world cotton trade was able to ignore the huge stock-pile until policies there began to change. First, Beijing announced it would replace purchases for the strategic reserve with a target price system for its farmers. For some traders and analysts, it meant more cotton would be competing for a finite world market, thus driving prices down. However, more damaging news from China would come later in October.
In September, the adjusted world price (AWP) for cotton fell below USDA’s base loan rate of 52 cents per pound for the first time since November 2009. Consequently, marketing decisions suddenly became more complex (see related story – Making the Right Marketing Decision). The following month, China dropped a bombshell.
Cotton traders were sent reeling and ICE cotton futures tumbled further in October after China’s National Development and Reform Commission announced cotton imports would be limited to 4.1 million bales in 2015, the minimum required by the World Trade Organization. Furthermore, sales from China’s strategic reserve would resume in March. With limited access to China, normally the world’s largest importer and consumer of cotton, U.S. cotton suppliers, including PCCA, would have to procure textile customers elsewhere. More recent developments that have compounded the uncertainty surrounding the cotton market are labor disputes at U.S. West Coast ports and an anti-dumping investigation launched by Turkey’s government.
U.S. cotton sold to Far East textile mills typically passes through West Coast ports, but stalled labor negotiations between the International Longshore and Warehouse Union (ILWU) and port authorities have disrupted the flow of import and export traffic. Consequently, some U.S. cotton shippers have had to seek alternative ocean freight transportation.
Meanwhile, Turkey’s announcement of an anti-dumping investigation on U.S. cotton imports has already affected U.S. sales with some contracts being cancelled due to the threat of a provisional duty. The United States supplies approximately 50 percent of Turkey’s cotton imports which represent 20 percent of U.S. cotton exports. Representatives of Turkey’s textile industry say they did not request the investigation and are opposing it.
As the 2014 U.S. cotton harvest was drawing to a close, attention was turning to the complex 2015 global planting outlook. According to an economic analysis from Cotton Incorporated, declining prices for commodities that can compete with cotton for planted acres could temper the “likelihood of an exodus from cotton” when planting season arrives. However, lower cotton prices could result in fewer cotton acres in certain cotton producing countries.
“The magnitude of any shift in global cotton acreage could eventually emerge as a factor affecting cotton prices,” Cotton Incorporated noted. There are a number of questions for the cotton market and cotton producers to ponder. Will lower cotton prices in China enable the fiber to re-claim market share from polyester, and will cotton stocks there decline? Likewise, will the drop in crude oil prices leave consumers with enough extra money to increase their spending on apparel? There is little doubt many analysts will be anxious to see this Christmas season’s shopping results.